Many twenty-somethings find themselves in debt coming out of college. And the bills keep coming as they head to graduate school, start an entry-level, low-paying job and try to start a family.
Ten years later, they still haven’t paid off their original debt and more piles up — the transmission blew, they made a bad call in the stocks or they get laid off. They don’t know how they got this deep in debt,and they don’t know how to get out.
Learning to manage debt now will save a lot of heartache and money down the road. It’s impossible to avoid all debt, but only go into debt for things you can pay back immediately.
“Good debt” is debt you use to pay for education, buying a house or something along those lines, according to consumercredit.com. Get a loan you know you can keep up with. This also helps build credit and proves to banks you are a low-risk borrower. In the future they’ll approve bigger loans because you’ve proven your dependability. Plus, if you find a low interest credit card, it’s much easier to pay back and stay above debt.
Avoid paying the minimum balance on your credit card bill. It keeps the debt collectors from calling, but it’s a vicious cycle.
When Brookann Kidd was 18, her dad set her up with a credit card with a $5,000 limit. She went to town.
“(The credit card) just showed up in the mail, and he told me it was my responsibility,” Kidd said. “At 19 I moved out. Although I was always independent, this was a whole new level.”
Even when friends or boyfriends did not have cash flow Kidd had, she didn’t want to just sit at home. She charged things for her friends to her card.
“Thinking I was being super generous, I would sometimes pay for my friends so I wouldn’t have to sit at home because of their money problems.”
Kidd got another credit card and continued the same patterns.
“I went out and had the time of my life — dinner, skydiving, trips, movies — I did it all,” Kidd said. “My father, who didn’t really mess with my finances, still had my credit union info and… he would mention that the balance was getting a little high, but to me that was just ‘the man trying to keep me down.’”
Kidd thought she was fine because she was still paying the minimum payment on her bills. But this became a downward spiral.
“I got the sinking feeling that I needed to do something about it when I went to the eye doctor and went to pay for my exam with one of my credit cards and it declined,” Kidd said. “The eye doctor knew my family well since he served in a bishopric with my dad, and even though he wasn’t the one processing my payment, it felt like the room was closing in on me.”
Kidd said her family knew she was floundering, but she was the last to realize it so her sister stepped in to help.
“She understood that if she squeezed me too tight I’d just run,” Kidd said. “By the time we sat down I had $7,500 between the two cards and that didn’t include my car that I still owed $3,000 on.”
They set a budget to pay off her bills and for her to live on week-to-week. Her sister also controlled her bank account and moved money away from Kidd.
“I had to curb my lifestyle that I had grown accustomed to,” Kidd said. “It sounds so dumb, but I still couldn’t tell people I was out of money. I would usually use an excuse of work or not feeling well or other plans.”
Kidd said her credit score has followed her and made things difficult as she’s gotten other credit cards and when she tried to buy a house with her husband.
If you have just a $2,000 spending limit and average interest rates and minimum payments, it would take 152 months to pay it off including $1,637 in interest rates alone. That’s almost the same amount the original limit. According to the Federal Reserve’s statistics, the average American household has $7,072 to $15,159 in credit card debt. The average American consumer has four credit cards. One in 10 consumers have more than 10 credit cards. Downsize.
“Do everything in your power to pay off your credit card bills immediately, and always pay more than the minimum balance,” Bill Tiernan, a financial advisor out of New York said.
Tiernan said interest rates are a huge factor in dragging people further into debt. Focus most of your energy and payments on the account with the highest interest rate to get rates lower. This is easier to do if once you show your dependability.
Even though your mortgage might be one of the most expensive debts you have, the interest rates for mortgages are usually very low — especially if you can refinance later. Keep up with mortgage payments, but pay off high-interest credit card, loans and bills sooner.
Even as you are putting so much of your paycheck into paying off debt, don’t forget about savings. Allocate a percentage for an emergency fund. If an emergency happens and you have no cash, you’ll end up with more debt and more time needed to pay it off.
“If you’re in debt, creating a budgeting is of the utmost importance,” Tiernan said. “Then you must stick to that budget. You have to make your paycheck spread across to cover all your bills and then start chipping away at debt.”
“Tighten the purse strings” to get out of debt. Stop eating out and going to the movies. Get rid of Hulu Prime and Netflix accounts. Use coupons when you go grocery shopping and stop buying brand name foods.
Head to the clearance racks and avoid buying full-price.
Buy non-perishable food items or household supplies in bulk; it’s much cheaper and you’ll buy less often.
Lower your utilities bills by doing all the things your mother told you to do. Don’t run the water when you brush your teeth, don’t run the shower for 30 minutes and don’t leave the lights on.
These things are simple, but you have to commit 100 percent to it. If you don’t commit, your debt woes will grow. Debt is something you have to stay on top of or it will consume you.
